Israeli Cost of Living Debate Fueled by New State Comptroller Report
A professional document released by the Israeli State Comptroller's office several months ago challenges the widely accepted notion that Israel is one of the most expensive countries within the OECD. While this claim has frequently appeared in government reports, discussions on the cost of living, and media headlines, the report suggests that the international price level index, often used for such comparisons, can be misleading due to currency fluctuations.
The document, authored by Yaron Fishman and Nir Lasar and published in February, was intended as a professional guide for audit teams. However, its findings have broader implications. The report highlights that exchange rate volatility can significantly impact the international price level index, potentially making Israel appear more or less expensive even when domestic prices remain unchanged. For instance, in 2023, Israel's consumer price index rose by 4.2%, yet its international price level index dropped from second to fourth among OECD countries, from 131 to 122. This shift was primarily attributed to the weakening of the shekel against the dollar, not a decrease in the actual cost of goods and services.
The report argues that an index designed to compare price levels at a specific point in time is not necessarily suitable for determining changes in the cost of living over time. A strengthening shekel can elevate Israel's ranking even with stable local prices, while a devaluation can lower it during periods of price increases. This is particularly evident in food prices. Between 2011 and 2020, food and non-alcoholic beverage prices in Israel rose by approximately 6.2%, compared to an OECD average of about 19%. Despite this, the international price level index indicated a widening gap to Israel's disadvantage.
However, the report does not dismiss the cost of living issue entirely. When examining purchasing power, the picture becomes more complex. In 2022, the median disposable income in Israel allowed for the purchase of approximately 20,700 units of a standard "food basket," compared to an OECD average of about 24,600 units. This suggests that while price levels alone don't tell the whole story, household purchasing power in Israel remains below average in some comparisons. The State Comptroller recommends using a range of complementary indicators, including hourly wage purchasing power, median wage, and disposable income, alongside price indices, to gain a more accurate understanding.
The report also questions the relevance of comparing Israel to the entire OECD average, given the vast differences in economic conditions, productivity, and government policies among member states. It suggests comparing Israel to countries with similar economic standing, such as the UK, France, Italy, Spain, Japan, and South Korea, and to a benchmark group including the Netherlands, Denmark, Sweden, Austria, Finland, and Switzerland. This methodological debate is crucial, as the way Israel's cost of living is measured influences policy decisions. A study by the Aaron Institute for Economic Policy at Reichman University found that a basket of goods and services in Israel is about 21% more expensive than in a group of wealthy countries like Austria and Denmark, despite their higher per capita GDP. Housing prices, in particular, have shifted from being 31% lower than in these wealthy countries in 2005 to 26% higher today.
